The Oppenheimers Take The Money And Run
It is not every day that someone walks away from a century-old monopoly, but the Oppenheimer family recently agreed to sell their stake in the De Beers diamond cartel for five billion dollars. This astonishing move seems to illustrate the growing unease over the continued profitability of the diamond industry.
The secret behind the De Beers empire was to control the market price of diamonds by getting essentially all diamond producers to sell their stones through De Beers, which in turn guaranteed to buy them no matter how oversupplied the market might be at the time. With virtually a 100% share of the market, De Beers was able to set the price of diamonds at a high level, which garnered vast profits for the company and made its cartelized suppliers very happy as well.
This happy little game of insiders versus everyone else might have gone on forever, were it not for several factors that combined to break up the monopoly. The first factor was the need for De Beers to buy all stones no matter what. In times of recession, this obliged the company to hold tremendous numbers of unsalable diamonds in its vaults until economic conditions improved. When the supply of diamonds came primarily from South and Central Africa, De Beers was in firm control.
As new diamond fields opened production in the 1980s, producers such as Russia, Canada, and Australia added a large gross number of diamonds to the yearly production total. This increase in supply eventually proved too large for De Beers to swallow. In addition, not all of the new producers were willing to join the cartel. Finally, technological refinements in the field of synthetic diamonds brought the quality of these competing products up and the price way down.
These factors combined to produce a diamond market that has a significant and growing oversupply problem coupled with a temporary fall in demand due to the worldwide recession. With a buyout proposal in hand from their De Beers partner, Anglo American Mining, the family elected to take the bird in hand rather than pay to pile up stones that might not sell for many years to come. While none can say if the Oppenheimers made a smart play to escape a dying industry, or gave in to panic right before the globalizing economies of Asia added new demand to the diamond business, their fortunes are no longer hostage to a pile of rocks in a Johannesburg bank vault.